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Chapter 4: Question 30Q (page 180)

On January 30, 2016, a suit was filed against Frazier Corporation under the Environmental Protection Act. On August 6, 2017, Frazier Corporation agreed to settle the action and pay $920,000 in damages to certain current and former employees. How should this settlement be reported in the 2017 financial statements? Discuss.

Short Answer

Expert verified

The settlement of the lawsuit would be considered a non-operational expense.

Step by step solution

01

Meaning of Financial statements 

Financial statements are the progress reportsof the business entities that are prepared to ascertain the overallgrowth of the business. Such reports are prepared annually and communicated to various concerned users.

02

Treatment of lawsuit

According to the situation mentioned above, the company should create a provision for the lawsuit in the books on December 31, 2016, but the company has not done the same.

At present, the company must show the settlement amount as an expense in the income statement鈥檚 non-operating expense.

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Most popular questions from this chapter

Cooper Investments reported an unusual gain from the sale of certain assets in its 2017 income statement. How does intra period tax allocation affect the reporting of this unusual gain?

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Question: O鈥橫alley Corporation was incorporated and began business on January 1, 2017. It has been successful and now requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2017. The accountant for O鈥橫alley Corporation provides you with the following income statement which O鈥橫alley plans to submit to the bank.

O鈥橫ALLEY CORPORATION

INCOME STATEMENT

Sales revenue \(850,000

Dividends 32,300

Gain on recovery of insurance proceeds from

earthquake loss 38,500

920,800

Less:

Selling expenses \)101,100

Cost of goods sold 510,000

Advertising expense 13,700

Loss on obsolescence of inventories 34,000

Loss on discontinued operations 48,600

Administrative expense 73,400 780,800

Income before income tax 140,000

Income tax 56,000

Net income $84,000

Instructions

Indicate the deficiencies in the income statement presented above. Assume that the corporation desires a single-step income statement.

Bradshaw Company experienced a loss that was deemed to be both unusual in nature and infrequent in occurrence. How should Bradshaw report this item in accordance with IFRS?
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